Legal practice in listed companies’ overseas M&A

According to item (3), article 4 of the Provisions on Several Issues concerning Regulation of Material Asset Restructurings of Listed Companies, issued by the China Securities Regulatory Commission (CSRC), ensuring integrity and validity of a target’s assets has been a top priority for the securities regulator, given that any title defect could have an impact on a target’s sustainable profitability and the viability of commitments as to performance.

In the case of Shandong Tyan Home involving asset acquisition, the CSRC was especially concerned about whether the mining rights held by Hanking Gold Mining (the target) were integral and extendable and whether land extension was at risk. In the case of China Aerospace International Holdings, also involving asset acquisition, the CSRC was worried that the mortgage created over 100% of the land held by IEE’s Slovakia subsidiary, and its buildings and structures, in favour of a local bank might have an impact on asset ownership of the acquiring listed company upon closing of the deal.

As the first step of the due diligence process performed on an overseas target, Chinese lawyers should identify ownership of all assets held by the target so that integrity and validity of ownership is ascertained. This requires not only collaboration with an accountant in establishing an asset ledger covering all assets of the target, but also familiarity with provisions of the local jurisdiction concerning assets, including, without limitation, access to information about validity period of the ownership, what can be done upon expiration of the validity period, how the asset is acquired, and encumbrance on the assets, if any.

Wang Guan is a partner and Meng Wenxiang is a salary partner at Grandway Law Offices. Xie Yijie, a paralegal at Grandway, also contributed to this article